Is a 1099-R with box 7 code 1M taxable?

[gcole03]

I have consulted with the IRS website and with IRS certified tax preparers about this question.  Code 1M is a qualified plan loan offset and is not taxable.  Code 1L is taxable but 1M is not.

[Carl]

There is no single code of "1M" You have two codes, a "1" and an "M". It's taxability is determined based on what you did with the money, which you will be prompted for on later screens.

[tishsmiles27]

Do you mark it as "cashed out" or rollover since its a repayment of a loan?

[dmertz]

When preparing your 2018 tax return you'll indicate as rolled over whatever amount of the code-M distribution you were able to roll over.   Any portion not rolled over would be a cash-out.

If you anticipate rolling over an offset distribution, you should request a filing extension by April 15, 2019 if you do not complete the rollover by that date, then file your tax return before October 15, 2019 after rolling over as much as you intend to roll over.

[dmertz]

A code 1M distribution is certainly taxable and subject to an early-distribution penalty unless you come up with the money and roll it over before the due date of your tax return, including extensions.  If you do not have the money to complete the rollover, whatever portion you do not roll over is taxable and subject to early-distribution penalty.

The main differences between a code 1M distribution and a code 1L distribution is that a code 1L distribution is not eligible for rollover and does not satisfy the loan.

[EastCoastRoots]

Does an employer get to choose whether they put 1L or 1M? I am asking because I took a loan from my 401(k) // Profit Sharing in February 2020, made my first repayment in March and on April 1 I was informed my department was permanently closed so I separated from employment effective 4/1. My final paycheck was on 4/14 and that was  my second loan repayment. I received a general employment termination notice that summarized various benefit procedures. It indicates I have 45 days from the date of termination to repay the outstanding balance. It goes on to say if I do not pay off the remaining balance with it the deadline my loan will be in default and will be considered an early distribution subject to taxes and penalties. It then states the loan may not be rolled over to an IRA or a new employer plan.

While I am unable to pay off the remaining balance within 45 days from the date of my termination I believe I will have the means to contribute the equivalent of that amount into an IRA by my tax filing deadline (April 15 2021).

It is not clear to me when I’ll receive my 1099-R but I am anxious about what the two codes in box 7 will be. I truly hope it says 1M but I’m wondering if the employer can choose 1M or 1L. I don’t want it to be a deemed distribution. I want it to be considered an offset. I’ve read your replies in many of these threads and so appreciate any insight you may have.

[dmertz]

The choice of code L or code M is not optional, it's dictated by the circumstances.  Since you did not default before separating from service with this employer, the loan should be satisfied with an offset distribution, code M,  and should not be treated as being in default subject to a deemed distribution, code L.  Offset distributions are eligible for rollover, so contact the employer to resolve the error in their instructions that indicate that the distribution is not eligible for rollover (implying that they will be incorrectly reporting a code-L deemed distribution).

The difference in the circumstances is that after separation from service you are permitted to make distributions whereas before separation from service you are not.  If you were still working for the company and defaulted, the loan becomes taxable but is not satisfied, and you are still required to repay it.

[EH1983]

Got a 1099R with code 1M in box 7.  Received a termination letter (job discontinuance) that stated my amount was 17K plus.  I actually received 11,833 since they take out taxes on the 17Kplus, but my 1099r shows no taxes taken out.  Is this normal.

[dmertz]

The amount in box 1 of the code 1M Form 1099-R is the amount of the offset distribution.  You would not have received any of this money since it went to satisfy the loan; you already received this money when you got the loan.  A code 1M Form 1099-R should never show any income tax withholding since no cash is actually distributed from the account as part of the offset distribution; there can be no taxes withheld from an offset distribution since no cash is distributed.  The offset distribution simply reduces the balance to your credit.

Taxes relative to an offset distribution can be withheld from a concurrent distribution of cash paid to you, but that would be reported on a separate Form 1099-R reporting this regular distribution.

It's not clear what is meant by the letter stating that "my amount was 17K plus." It seem that $17k+ was either the total balance in your account, including the outstanding loan amount (which is essentially one of the investments held in the account), or the remaining balance in the account after subtracting the outstanding loan amount.  It's also not clear what you mean by "I actually received 11,833" since, if any amount was paid to you from the account in cash, that's a separate distribution reportable on a different (code 1) Form 1099-R, and that's the Form 1099-R that would show any tax withholding.

[JANIROSS]

I was working for a company with an outstanding 401K loan. I quit  this job and went to work for a new company. My 1099-R lists 1M as a distribution code. In an attempt to file my taxes, the dropdown option "1M" is not available on my tax software.  I was told i should not select code 1L instead. I am not able to pay this money back or to rollover. What should I do?

[dmertz]

Codes 1 and M are two separate codes.  Enter each one separately.

Since you will be unable to come up with the money to be able to roll this distribution over, this distribution is taxable and, if you have no exception that applies, to a 10% early-distribution penalty.  If you were able to come up with the money, the code M on this 2020 Form 1099-R indicates that you have until the due date of your 2020 tax return, including extensions, to come up with the money and roll over any or all of this distribution.